RETAIL CONSOLIDATION

David Merrefield

Does it just seem that way, or is it nearly impossible to pick up an issue of SN without learning that another buyout involving a food retailer has just occurred?

There's one good way to find out. I laid out 20 of the most recent weekly issues of SN to see how many financial transactions of a magnitude sufficient to make it to the front page have been cited. I found that seven deals involving retailers were mentioned on SN's front page in that time alone.

So let's spend a moment trying to figure out what's going on and what it means for the future, starting with the transaction detailed on the front page of this issue, namely Fred Meyer's proposed blockbuster acquisition of Quality Food Centers and Ralphs Grocery Co. The deal is worth nearly $5 billion, counting the value of the stock and debt assumption involved.

What seems to be happening is that retailers have discovered that the best way to put assets to work -- particularly the intangible asset of an ability to operate efficiently -- is to buy another company and roll operational and management expertise into the acquired store base. The alternate option of obtaining growth slowly by means of opening stores often under-uses an organization's assets.

What's the effect of consolidation? The most obvious effect is to deliver more and more sales volume to fewer and fewer companies. Here's one way to measure concentration: Jan. 20, 1997, SN published a list of the Top 75 food-distribution companies in North America. At that time -- less than a year ago -- the Top 10 on the list had a combined share of about 51.4% of total supermarket sales. Altering the Top 10 list to reflect the net sales volume of Fred Meyer, QFC and Ralphs (and dropping the smallest company from the list) gives the new Top 10 a market share of about 52.8%, an increase of 1.4 percentage points. (This is a pro-forma estimate based on 1997 total supermarket sales in the United States as cited by the Food Marketing Institute. The share estimate doesn't take into account sales growth of individual companies since the first of the year, or any such factors, but should roughly approximate market-share proportions. The Top 10 distribution list includes results of two wholesalers and sales generated by Wal-Mart Supercenters. SN will publish an updated list and detailed analysis of industry sales Jan. 19, 1998.)

This quick look demonstrates that industry sales are certainly aggregating -- the big are getting bigger and doubtless will continue to do so. It doesn't follow, though, that the industry is so concentrated that retail price points and profit margins are likely to build rapidly, or that the distribution process is becoming less complex.

That's because the bottom half of the retailing industry remains quite fragmented, so there are plenty of retailers left in plenty of geographical areas; together they will keep competition high.

On top of that, competition and complexity will be propelled by alternate formats' nonstop incursion into grocery-product sales. Moreover, pressure will be on supermarkets because spending on food-away-from-home is now at the rate of about half of all food expenditures. It's likely that the portion of food spending in non-supermarket venues will continue to grow, as it has for a generation.

This all means that the retail industry is achieving some degree of efficiency by means of consolidation, but we're far from the time when retail food sales become so concentrated that margins can be increased or that systemic complexity is being reduced.